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Archives: Should the U.S. end all government subsidies?

Originally published in May 2011Simon Nguyen

The partisan fight in Washington on whether or not to end subsidies for oil companies is reigniting the debate over the role of government. Should a free-market economy like the U.S. partake in the business of subsidizing companies and industries? Currently, there are 2145 federal subsidy programs in America. However, the U.S. is not the only country that gives subsidies to domestic entities. Other countries also subsidize their key industries.

In an ideal world, all of the world’s major economies would universally adhere to free-market principles and end all government subsidies. Unfortunately, such a world does not exist. If the U.S. suddenly decides to end its subsidy programs, it is unlikely that its competitors would follow suit. Some countries may even increase their subsidies to take advantage of the U.S. situation. Also, it may be impossible for countries like China and Russia to cut subsidies since most of their biggest companies are state-owned.

Subsidies were originally created to foster the growth of new industries. In recent years, they have been used to cancel out the effect of globalization. The propagation of free trade has put traditional industries in economies with high labor costs such as the U.S. at a disadvantage.

While this weakness is compensated by gains in other areas of the economy, the lack of a strong production base constitutes a threat to U.S. national security. What if a third world war suddenly breaks out and global trade is disrupted? Economies that are not self-sustaining will be in serious troubles. Subsidies are necessary to ensure that core sectors such as agriculture and manufacturing remain viable against the forces of globalization.

Unfortunately, not all U.S. government subsidies are necessary and useful. Many of the subsidies are being given to politicians’ pet projects that give little benefits to the economy. To an extent, the partisan spat over oil subsidies shifts focus away from the real problem. While oil companies make a lot of money, they do pay more in income taxes than any other industry. In 2010, oil giant Exxon paid $21 billion in taxes including $1.3 billion to the federal government. Compared to fellow subsidy recipient GE, which pays no federal tax on its $5 billion profit, the oil company actually pays its share.

Instead of going after the “evil” oil companies for the big headline, we need a comprehensive review of all subsidy programs to eliminate waste and inefficiencies.